It was July 1, 1988. Frank Mella, editor of the German financial newspaper Börsen-Zeitung, had devised at his publisher’s request an index for Germany as a financial center. The result, the German stock index (Dax), was published for the first time that Friday. Until Friday, this stock market barometer has shown the evolution of the 30 largest and most liquid companies on the German stock market. An index that has been unchanged. Until today. The index is reformed in a plan that contemplates several points, although the most important is that the DAX goes from 30 to 40 values with criteria to be part of the index such as having positive results as of December and notification obligations and regulations of normative compliance.
Measures taken to “clean up” the reputational damage caused by cases such as WireCard or the feeling among many analysts that companies with high indebtedness and few profitable companies are listed on the index. . What opinion does the most important stock index in Germany deserve then? How has it performed compared to other European indices? And what improvements will the reform bring?
We have addressed the first two questions in the Dax study: Leit- oder Leidindex (Dax: reference or suffering index) prepared by the Flossbach von Storch Research Institute, and the results show that, to tell the truth, the Dax is better than your reputation, says Kai Lehmann, senior research analyst at the Flossbach von Storch Institute
From 2010 to September 30, 2020, the Dax 30 registered an increase in value close to 113%, including dividends. An index that performed better than that of European indices with the Swiss index (SMI) as the only index that outperformed the period.
The relatively good performance of the Dax 30 has a fundamental explanation: during that time, the growth of the turnover of the Dax companies was, with an annual average of 2.4%, much higher than that of the French Cotation Assistée en Continu (CAC40 ), with an annual average of 1.4%, or that of the Spanish IBEX, with 0.8%. In terms of profitability or increased profits, with an average of 3.1% per year, Dax companies are not only well ahead of the benchmark indices in southern Europe, but also outperform companies in the Swiss SMI, whose evolution was somewhat better.
In a comparison at the European level, the assertion that other benchmark indices on the continent show a greater diversity of companies and better reflect the general economic environment of the different sectors does not hold up either.. In fact, the Spanish index includes 35 companies; the Italian and the French, 40 each, and the Swiss SMI, only 20. Only the British Financial Times Stock Exchange (FTSE) reaches 100 companies, a much higher figure.
However, the latter does not mean that the diversification of sectors is better. For example, “if we take into account the market capitalization of the Dax companies, 53.8% of them belong to the three main sectors. In the case of the Swiss index, the figure is even 80%. The FTSE 100 is also above the German value, ”says Lehmann.
So that, the Dax does not have a higher concentration risk than other large European stock indices, although it does have a relatively high proportion of cyclical consumer stocks. On the contrary, the energy and financial sectors are underrepresented, while in the Italian and Spanish indices they have an important weight, which in turn explains their weak evolution. More so now that the Spanish electricity companies are suffering from the Government Decree to control the rise in electricity!
Deutsche Börse’s plan to restructure the Dax 30 after more than three decades of existence looks like a resurgence that, according to Deutsche Börse itself, aims to turn the index into a “more resilient and representative” benchmark. From now on, only profitable companies will be able to join the German index, and they will also have to comply with certain corporate governance rules.